Reinsurance Sidecars: The Next Stage in the Development of the Longevity Risk Transfer Market

Abstract

The longevity risk transfer market in Europe and North America remains in its infancy despite rapid growth in recent years, and further qualitative progress is needed to develop a commoditized market. Reinsurance sidecars, which are commonly used in the property and casualty market in the United States, have enormous potential to play an important role in such development. Transaction structures involving reinsurance sidecars can be adapted to benefit cedants and sponsoring reinsurers and also to attract a broader spectrum of investors and participants by reducing the long-tail risk inherent in longevity risk transfer. While several transaction structures are possible, each would fundamentally provide additional capital to support transactions in a form that is not subject to a requirement to hold a regulatory solvency capital buffer, thereby enabling sponsoring reinsurers to offer keener pricing to cedants. As a result, a European Union-based cedant could gain considerable capital benefits by reinsuring longevity risk, market risk or both to a reinsurance sidecar.